Thursday, August 13, 2009

Political pundits will point fingers in all sorts of directions when it comes to the recession. Many Democrats will tell you Obama saved the day with forceful stimulus. Republicans, of course, will suggest that things look like they might be bottoming out despite the stimulus (we only spent a small percent of it, don't you know?) rather than because of it. I find this differential blame and credit interesting, since most economists cite someone entirely different for - if not ending the recession, at least preventing a second Great Depression (and before we're done this may still be considered a depression, just not a "great" one). That man is Ben Bernanke, chairman of the Federal Reserve Board since 2006. Jack Welch has even gone as far as calling Bernanke a "national hero" for what he's been up to since last summer.

I won't go into detail here about what Bernanke did that people are so impressed with. I'll leave it at this: he did the opposite of what conservative and liberal economists alike said turned the stock market crash of 1929 into the Great Depression of 1931/32 - he expanded the money supply considerably in the early stages of the crisis.

What I would rather talk about is who Bernanke is as a person, and why that's very important, given the historical reaction to "banking" and central banking in particular in the United States. Banks have been given a bad reputation by Federalists ("Banks have done more injury to the religion, morality, tranquility, prosperity, and even wealth of the nation than they can have done or ever will do good" - John Adams), Democratic-Republicans ("I believe that banking institutions are more dangerous to our liberties than standing armies" - Thomas Jefferson), and Jacksonian Democrats ("The bank, Mr. Van Buren, is trying to kill me, but I will kill it" - Andrew Jackson). Over time, of course, many politicians eventually came around to the Hamiltonian conclusion that a national or central bank to manage the money supply wasn't necessarily a bad thing; that it could do a great deal of good. Even James Madison, a contemporary of Hamilton and early opponent of central banking and bankers in general, relented and gave us our second national bank. But the early - and broad - opposition of the founders to banking interests stuck.

Ever since then, populist sentiment in America has been intimately tied to a general opposition to banking. William Jennings Bryan (pictured right), perhaps the most famous populist leader, was outspoken in his opposition to a central bank. What is ironic about Bryan's opposition is that he was also a strong advocate of what we would now call "expansionary monetary policy". He historically declared to his opposition that "you will not crucify mankind on a cross of gold" - an electrifying denunciation of the gold standard and "tight money" in general, which prevented farmers and factory workers from getting access to credit.

This is what I find to be so ironic about the ebb and flow of populism in America, specifically with respect to the populist position on central banking. In Jefferson and Bryan's time, the concern was that bankers were too tight-fisted, and that creating a central bank to help finance government deficits would allow private insiders to profit off of taxpayers. Today, you have the opposite concern. The Ron Pauls of the world think the opposite is true - that the Fed is creating too much money. Granted, Ron Paul's libertarianism - while not exactly the corporatism that Bryan decried - is also a far cry from populism. But it is a populist movement in it's deliberate "us vs. them", anti-establishment, pro-common man mentality. The collective memory of stagflation in the 1970s made impoverishment-by-central-bank-manipulation fear a new staple of American populism, which is why it meshes so well with libertarianism today. It is in this sense that the seemingly paradoxical blending of populism and libertarianism, while not necessarily internally consistent, is highly functional at the level of the political movement. A populist that doesn't like foreign intervention and wants to legalize marijuana is going to find the most solace and organization among the Ron Paul community (Dennis Kucinich would also give them solace, but not as much organization).

Now back to the purported enemy - the bankers.

What I like about Ben Bernanke is that in every respect he seems to be a "regular guy" banker. Certainly much of that sentiment is supported by superficial (read "tenuous") evidence, but it's something that I still believe to be true. Whoever Ben Bernanke "really is" he's clearly no Robert Rubin or Hank Paulson flying in from Citigroup or Goldman Sachs. One thing that's been truly unique about Bernanke (I mean besides the growth rate of the Fed balance sheet under his tenure) is the extent to which he has reached out to the public. Fed watchers were shocked when he appeared for a prime-time interview for 60-minutes, something that is rarely done by sitting chairman (I believe it was only ever done once before). He didn't stop there, he's taken questions from undergraduate students at Morehouse College (the only all-male historically black institution), and held a town hall meeting of his own in Kansas City, taking questions not from economists, bankers, and Congressmen, but from self-identified small business owners and mothers. He often speaks of his own humble beginnings in a small South Carolina town, and how the house he grew up in is now in foreclosure. He is also very open about what he describes as his "disgust" over the necessity of rescuing large banks at the height of the crisis. Can you imagine Greenspan expressing "disgust" at that sort of thing?

To truly get a grasp on how different this is, you have to understand the extent to which the Fed chair is a banker's banker. His job is to lend money to the money-changers, to make sure they have enough funds to stay in business from day to day. The press hangs on the Fed's every word, and global markets shift in response. Statements released from the clandestine Open Market Committee (FOMC) meetings are scrutinized like papal encyclicals. For example, after Wednesday, August 12th's meeting, reporters made headlines with the fact that the language describing the pace of economic contraction changed from "slowing" (July's statement) to "leveling out" (August's statement). Chairman Greenspan was known as "the maestro", and during the Asian financial crisis he was on the "committee to save the world". As a presidential candidate, John McCain quipped that if Greenspan ever died he would put dark sunglasses on him and prop him up like a scene out of "Weekend at Bernie's". Such is the mystery, adoration, and power surrounding the Federal Reserve Board and the Fed chair.

My approval of Bernanke isn't just an image thing, either. It would be one thing if Bernanke put a friendlier face on the secretive Fed. But he's doing more than that - he's following an expansionary policy that priveleges debtors over creditors (a la William Jennings Bryan), and staves off a potential second Great Depression (a la Milton Friedman - not John Maynard Keynes, as many mistakenly suggest). The hope is that he is pursuing these goals with a realistic understanding of the risks posed by monetary expansion; that he is striking the right balance between avoiding paranoia about moderate inflation while staying mindful of the risk of excessive inflation. Bernanke has insisted to Congress that he can strike that balance.

I wouldn't predict that it's going to be easy street from here on out, but I think it will go as well as we can hope for. Job growth will be weak for years to come, but we'll avoid a Great Depression (which was an extremely real possibility this past Fall), and we'll avoid a dip into deflation or an excessive inflationary episode as well. For this reason, I think Bernanke will easily retain the respect that he has earned from economists.

But I hope he'll also earn respect for something else - I hope he can permanently sever the often contradictory relationship between American populism and mistrust of banks. Indeed, I hope he can communicate to the public how responsible monetary and fiscal policy can be a tool of the people. Economists often worry that popular pressure will lead to unsustainable inflationary episodes, and ideologues often worry that any active monetary or fiscal policy can threaten liberty by giving an inordinate amount of power to "the state". I don't see why we have to accept either interpretation. When good, intelligent people who are aware of their (very real) limitations make these policies in consultation with the public, there is no reason why the Federal Reserve Board can't be an instrument of prosperity and liberty.